Weakening and Strengthening Basis

The basis can change in two directions, either increase or decrease. An increasing basis means that the basis is becoming less negative or more positive. This is called a strengthening or narrowing basis. A decreasing basis means that the basis is becoming more negative or less positive. This is called a weakening or widening basis.

Strengthen
Basis become more
positive or less negative
Weaken
Basis become more
negative or less positive
Strengthening Basis
Cash price increasing faster
relative to futures price
Cash price decreasing faster
relative to futures price


In the next chapter we will learn about hedging in commodity market and how basis plays a crucial role in the hedging strategy.


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